Business Cuts Back
March 21, 2016
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The chart above shows that business has largely lost interest in using its profits to expand and modernize the US capital stock. Each point on the chart represents a five year average of investment in private, nonresidential fixed assets net of depreciation. The points are constructed using a trailing five year average to remove short term fluctuations and allow a clearer look at the longer term trend.
The chart comes from a Businessweek article and here is what the authors have to say about the trend:
The public is in a foul mood this campaign season, in part because living standards have stagnated. The median household income in January was slightly lower, adjusted for inflation, than it was in January 2000, according to Sentier Research. Pay is lagging partly because companies have been underinvesting in the tools that workers need to be more productive. Those tools, which range from machines to software to land and buildings, are collectively known as capital.
The chart . . . shows that companies are adding to the national stock of capital at an historically slow pace. In a separate calculation, the U.S. Bureau of Labor Statistics says that what it calls “capital intensity”—the ratio of capital used to hours worked—was so weak that it actually subtracted from workers’ productivity from 2010 through 2014.
Investment normally falls during periods of recession. What the chart above shows is that we can no longer assume that business investment will rebound during a period of economic expansion. And this expansion has been marked by exceptionally low interest rates which should have encouraged investment.
Business apparently sees few privately profitable investment opportunities and owners are content to channel profits into higher managerial salaries, stock repurchases and dividend payouts. So much for market logic which continues to demonstrate little concern with our need for investment to combat climate change, rebuild our cities and infrastructure, strengthen our education and health care systems, and the like.